Tag: charitable giving

McManus & Associates Founding Principal John O. McManus and one of his philanthropically-minded clients were recently interviewed by Forbes Editor & Reporter Ashlea Ebeling about the advantages of setting up a charitable trust. From the article, “Why Charitable Trusts Rule Under The New Tax Law”:

When Terrence Hahn left Honeywell as head of its home and building technologies division this year, he had amassed a lot of company stock over 11 years and was facing a huge capital gains tax bill if he sold. Looking to diversify his portfolio and to formalize his family’s charitable giving, he found a handy solution: A charitable remainder unitrust.

“In today’s jittery markets, clients are more than ever focused on monetizing these concentrated stock positions,” says his tax and estate lawyer, John McManus, of McManus & Associates in New Providence, N.J.

The pitch: If you put appreciated assets into a charitable remainder unitrust (CRUT), you postpone or avoid capital gains tax. The trust pays you a fixed percentage of the principal as revalued each year—for a set number of years or life—and what’s left in the trust at the end goes to charity. In Hahn’s case, the ultimate beneficiary is a family foundation. The CRUT/family foundation is a great combination if you want flexibility and control over how you shape your ultimate charitable legacy, McManus says.

The story goes on to explain why there’s even more reason to consider a charitable remainder unitrust today:

CRUTs have been around for decades. But there’s more than just the old reasons for setting up a CRUT today. The new Trump tax overhaul made changes that favor their formation. First, by increasing the standard deduction and capping the state and local tax deduction, the new tax law dramatically cuts the number of taxpayers who will benefit from itemizing deductions, including deductions for charitable donations. In addition, the new law eliminates the Pease provision that limited deductions for high income taxpayers. Today, by making a big one-time gift upfront to a charitable trust, donors will be able to snag the charitable deduction. And if you donate appreciated assets, there’s the capital gains tax play too. Remember, the top capital gains tax rate is still 23.8%.

Read the full Forbes article, which includes additional insight from John, by clicking here.

To set up a time to discuss giving strategies that should be considered in light of your unique interests and financial situation, call McManus & Associates at 908-898-0100. We would love to help you support causes about which you’re passionate—and in a tax-effective way.

John O. McManus, founder of trusts and estates firm McManus & Associates, was honored statewide with the New Jersey YMCA State Alliance 2018 Social Responsibility Champion Award for his devotion and passionate advocacy to the Y and the community for over 10 years. In 2005, John joined Somerset County YMCA’s (SCYMCA) Board of Directors and currently is the Vice Chair of the Board of Directors and Chair of the Board Governance Committee, as well as serving on the Financial Development Committee and Capital Campaign Leadership Cabinet. Recently, John was elected by his peers to be the next Board Chair beginning in January 2019.

See the YMCA’s release on McManus being named the New Jersey YMCA State Alliance 2018 Social Responsibility Champion Award by clicking here.

According to Somerset County YMCA Board Chair Mark Irwin:

While John has effectively raised funds throughout his service to the Y, his increased enthusiasm over the past six years has been remarkable.

From 2013 through 2018, John personally raised $279,440 for SCYMCA, which helped to surpass the campaign goal each year. In 2012, overall gifts to the Annual Campaign equaled $185,668, and in 2018 SCYMCA raised a total of $1,003,526 – a 540% increase.

Irwin continued:

Through his tenure as a volunteer, John has grown as a respected, cause-driven leader. His dedication to the Y has resulted in vital funds that help the Y to provide financial assistance and mission-based programs, which enhance quality of life and make a meaningful difference.

John strengthens community by bringing the Y’s mission to life and ensuring that everyone in the community has the opportunity to learn, grow and thrive.

John consistently demonstrates a passion for giving back to advance the Y’s mission and to address challenging community needs.

Click here to read Irwin’s full speech on McManus’ unique and outstanding contributions to the Y.

In his speech at the award ceremony, McManus shared the secret behind his success:

For my wife and me, fundraising has become second nature. It starts with a story that we believe in that must be communicated well to a group that is passionate about helping others and delivered to a consistently-engaged, ever expanding-group of patrons.

Click here to read McManus’ full speech, including the five lessons he learned while growing up in the Bronx that fashioned, as described by Irwin and others, his “gift” as a fundraiser.

Ten Tips for Protecting Private Foundation Benefits

The end of the year means a drastic increase in philanthropic gifting.

If any of your clients are considering charitable gifts this month through a private foundation, here are 10 precautions to advise them about:

1. Use Caution when Compensating Family Members Through the Private Foundation

Certain transactions between a PF and a disqualified person are subject to self-dealing rules. The Internal Revenue Code imposes a 10 percent excise tax on the disqualified person for acts of self-dealing between a PF and the disqualified person. A disqualified person includes:

Officers and members of the PF board

Substantial contributors to the PF

Managers of the PF

Family members of any of the individuals described above

Be aware of the acts that are considered self-dealing between a PF and a disqualified person to avoid penalties, including:

Sale or exchange of property, or leasing of property, even though the terms are favorable to the PF

Lending money or other extensions of credit, except on an interest-free basis

Providing goods, services or facilities

Paying compensation or reimbursing expenses to a disqualified person

Transferring PF income or assets to, or for the use or benefit of, a disqualified person

There are some exceptions to these self-dealing prohibitions: The PF can pay compensation to a disqualified person for personal services that are reasonable and necessary to carry out the PF’s purpose and if the total amount of the compensation is reasonable.

Specific services that a disqualified person can provide include contract and lease negotiation, debt management and budgeting, accounting, supervision of property, operations and inspection, rent collection and supervision of personnel.

2. Don’t Fall into the Ticketing and Fundraising Event Trap

As a general rule, a disqualified person can’t use a ticket to a charitable event receiving support from the PF. This includes attendance by a guest, such as a spouse, of a trustee of the PF.

A trustee can only attend a charitable event if she has responsibility for evaluating and reviewing the activities of the PF.

3. Follow Guidelines for Sharing Office Space, Equipment and Personnel with a Family Office

Office space. The general rule for office space is that it’s an act of self-dealing for an FO to pay the PF for its portion of the lease (the opposite is also true—renting space to a PF). To solve this problem, the FO must enter into its own separate lease, and the landlord can’t be a disqualified person. The common areas should also be allocated to the FO—not to the PF—because the PF can’t pay for such space and then allow the FO to use it. If separate offices and leases aren’t a viable approach to self-dealing, the FO should sign the lease and allow the PF to utilize the space rent-free. Renting to a PF isn’t self-dealing if the lease is without charge. The lease is still considered to be without charge if the PF pays for its own utilities and other maintenance costs to third parties as they occur.

Equipment and supplies. The FO can purchase and provide the supplies at no cost to the PF, or the FO and the PF can enter into separate contracts with a third party to provide the necessary equipment and supplies. If the technology infrastructure can’t be divided between two entities, the FO must pay the expenses and allow the PF to use it free of charge.

Personnel. It may be difficult to separate the time of a shared employee in a shared space, so the safest and best response is always to have the FO pay for these services and not charge the PF. If the employee’s time can be allocated between the two entities, it’s possible for the FO to employ the individual, with the PF providing reimbursement; however, these services must constitute personal services, which aren’t considered secretarial assistance.

4. Avoid Legally Binding Pledges

A member of the board making a personal pledge for a charitable donation, but wishing to have it fulfilled through the PF, rather than through personal funds, causes an issue. This is an act of self-dealing. If an individual, officer, trustee or president of a PF makes a pledge that isn’t legally binding, the PF can assume the pledge. However, the PF can’t assume a legally binding obligation of one of its disqualified persons.

5. Identify any Benefits from Joint Investments and Co-Ownership

A disqualified individual may assume that she can enter into a business proposition with the assistance of her PF, but the Internal Revenue Service has indicated that joint investments could inappropriately benefit the disqualified person and would be considered self-dealing in many circumstances. Depending on the facts, co-ownership of other types of property by a PF and a disqualified person may or may not be considered an act of self-dealing if the PF’s co-ownership confers a significant benefit to the disqualified person as the other co-owner. For example, in Private Letter Ruling 9651037 (1996), the IRS ruled that co-ownership of property by a PF and disqualified person wasn’t self-dealing because the co-ownership was not a sale, exchange or leasing of property. Further, the PF and the co-owner didn’t acquire an interest in the property from the other party; and the PF received its share of rental payments directly from the unrelated third-party tenants.

6. Promptly Address Misuse of Foundation Income or Assets

When family dynamics come into play, there can be liability for a director, so it’s always important to enlist an outside advisor. When there’s misuse of PF’s income or assets, the board will need to reevaluate policies to prevent the transaction from happening again. An example of misuse is a disqualified person displaying a PF’s artwork in his home or office. When a member of the board of the PF has been using PF funds or assets inappropriately, the board should marshal the evidence and retain legal counsel and a forensic accountant. Investigating utilities, furniture purchases, artwork and credit card statements may be a sufficient form of evidence. Legal counsel can then work with the forensic accountant to prepare a full report including all of the self-dealing transactions. If the PF’s directors and officers policy covers excise tax and self-dealing, it should notify the insurance company for possible reimbursements for legal expenses under the policy.

7. A Key Benefit of Seeking Legal Counsel Advice

If any transactions might be considered an act of self-dealing, the PF should seek legal counsel. After full disclosure, if a person relies on written legal advice, indicating that the transaction doesn’t constitute self-dealing, the person won’t be liable for any penalty taxes, even if the transaction is subsequently considered to be self-dealing.

8. Beware the Penalties of Self-Dealing

The PF doesn’t pay self-dealing taxes; it’s the individual who participates in the act who pays the initial tax. The first-tier tax on self-dealing is 10 percent, assessed on the amount that’s involved and will be imposed on the disqualified person. A 5 percent tax is imposed on the PF manager who knowingly and willingly participates in the transaction of self-dealing. A second-tier tax of 200 percent of the amount involved can be imposed on the disqualified person if there’s a failure to correct the self-dealing in a timely manner. According to the IRS, self-dealing taxes can’t be abated for reasonable cause.

9. Exercise Expenditure Responsibility

An excise tax of 20 percent is imposed on a PF for distributions that are classified as a taxable expenditure, which is defined as any amount paid by a PF. If a PF is making a contribution and doesn’t want it treated as a taxable expenditure, it must ensure that it exercises expenditure responsibility. Such responsibility includes:

Obtaining a written agreement from the grantee

Ensuring that the grant is spent solely for its intended purpose

Obtaining reports from the grantee on how the funds were expended

Recovering the funds if they haven’t been used for the intended purpose

Reporting such expenditures to the IRS on its Form 990 PF

10. Protect the Founder’s Mission

Many individuals establish their PF with a specific purpose for the use of PF assets through the use of a purpose clause. A charitable trust statement can also be included to provide a stringent interpretation of how funds that are being donated to the PF can be used. Governance structures are also beneficial options. One governance structure is to have outsiders act as individuals or majorities on the board. It can be specified that the PF will terminate in the event that the board tries to make a donation that’s not in line with the original intent. The founder can also sunset the PF to terminate within 10 years after her death so that decades later, the money isn’t at risk of being spent outside of the original intent. A gift document can also be included in the original creation of the PF stating that the gift may only be used for specific, delineated purposes.

Interested in protecting your estate and maximizing the impact of your charitable giving? Then establishing a Private Foundation is worth your consideration.

A Private Foundation provides the ability to retain control over the administration and investment of assets that have been recognized as important for future grant-making. By making gifts from your Foundation to charities in increments over time, you can extend your influence over the ongoing use of your gifts.

While there are many advantages of Private Foundations, there are also often-overlooked pitfalls (see below), which McManus & Associates Founding Principal John O. McManus recently discussed with clients, as part of the firm’s educational focus series. To listen, click here:

1. Using care when compensating family members through the foundation
2. Beware the penalties for self dealing
3. How to address office sharing with family offices
4. Promptly addressing misuse of foundation funds or income
5. Why you should avoid legally binding pledges
6. How to protect the founder’s mission
7. When to seek legal advice
8. How to exercise expenditure responsibly
9. Identifying any benefits from joint investments or co-ownership
10. Using caution with ticketing and fundraising events.

For guidance on the creation or management of a Private Foundation, contact McManus & Associates at 908-898-0100.

This week, The New York Times published the story, “Want to Help? Do Your Research Before You Donate,” which highlights John O. McManus as a trusted philanthropic advisor. As noted by the article, John recently challenged the firm’s foundation clients to think beyond the borders of their typical charitable intent and to consider a new initiative: the needs of those suffering in the most recent natural disasters. From the article:

Dr. Granowitz was on a business trip when the hurricane struck. He watched on television the images of devastation. The day he returned home, he got a call from John O. McManus, a lawyer who advises Dr. Granowitz on philanthropic giving through his family foundation.

“He said, ‘What are you doing about charity relief in Puerto Rico?’” said Dr. Granowitz, who is chief medical officer for a major pharmaceutical corporation. “I said, ‘Frankly, John, nothing yet.’ He said, ‘Well, get off the stick and do something!’”

This client worked with McManus & Associates to combine his own philanthropic mission with the immediate need of the people of Puerto Rico. In the story, The Times follows the charitable gift from its source to the distribution warehouse in San Juan.

Two key pieces:

In times of need, please think beyond your typical charitable beneficiaries. From The New York Times article:

Mr. McManus said the focus of his clients’ charitable giving includes organizations affiliated with the nursing profession and those that serve older people.

Take time to research these gift initiatives to ensure that your new charitable investments provide the “hoped for” yield. Also from the story:

Communicating directly with donors, showing the effect their dollars have had, is more than just a way to verify that the recipients have used the money. “We’ve found that people want to meet someone with the organization, and they want to hear the stories, the so-called ‘mission moments’ which give examples of their work,” Mr. McManus said.

McManus & Associates would love to help you think through your family foundation’s strategy, or if you are now ready to establish a family foundation, we are here to guide you through its creation.

Most importantly, if we can assist you to refine your own relief effort in the recently devastated areas of Houston, Puerto Rico, Northern California, Mexico City, or the tragedies in Las Vegas, New York City, or the First Baptist Church in Texas, please contact McManus & Associates at 908-898-0100; we’re happy to make the process easier.

Year-End Tax Planning Strategies Due To Trump’s Election

The election of Donald Trump, in addition to Republican control of the House and Senate, bodes well for significant tax reform during early 2017. For some people, this can present major opportunities for reducing taxes for 2016 by making some key year-end tax planning moves.

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